The Significance of Income Level

When people start throwing around financial advice (and when you’re deciding which advice to take), one of the considerations that often gets ignored is the significance of income level. Advice gets thrown around about what to cut and how to save without realizing that how much money you’re bringing in is the biggest factor in determining which advice will work for you.

Think about it: Someone making $90,000 per year has a lot more room to maneuver than someone making $30,000 per year (in most areas of the country). When the $90,000 person is setting up a budget, he will likely have categories in there that simply aren’t available to the $30,000 person (travel, meals out, etc.). Thus, a book that flatly says a budget should have travel and dining out categories in it won’t work for the $30,000 person unless that person spends way less in other areas such as housing and utilities.

If the $90,000 person gets into debt, there will likely be more areas to cut than the $30,00 person will have. The higher income person will likely be able to move to a lower cost of living area, trade down a car, or cut out more unnecessary expenses. The books and articles that throw out ideas for slicing a budget are probably more valuable to the higher income person since they can make more choices. The lower income person probably won’t have as much to cut. They will likely already be living in a lower cost of living area/dwelling, and not be spending on so many unnecessary items. While there will be some fat to cut, it might not be enough. They need to seek advice that includes very frugal tips, such as growing a garden, capturing and using rainwater, reducing utility use, etc. Telling these people to cut out lattes likely isn’t enough.

When you look at how much income level matters it becomes obvious why, as hard as it is, the lower income person avoid debt. If $30,000 just pays for your necessities, there will be no extra to pay off debt. The $30,000 person who takes on debt will find himself in a downward spiral more quickly than the $90,000 person and will find it much harder to reverse the spiral. There simply isn’t enough money to go around. The higher income earner still should avoid debt, if possible, but the income can likely support reasonable, small debt payments.

Debt level matters as much as income level. If the person who makes $90,000 per year ends up with $500,000 in debt, that is likely to put them in a much more strained position than the $30,000 person who has no debt. Who is likely to be more miserable? However, if the high earner has just $10,000 in debt, they are likely to be better off than the $30,000 earner who has $10,000 in debt. The dollar value of the debt is the same, but its impact on each individual will be very different because the income level is different.

When you’re thinking about setting up a budget, investing, taking out a loan, getting out of debt, or taking any financial advice, you have to consider your income level. It’s not enough to read a story about someone who paid off $30,000 of debt in six months and think that you can do that, too. When you’re evaluating their story and wondering if it can apply to you, you have to know how much income they were working with. Did they do it on a $100,000 income or a $50,000 income? Similarly, you can’t just follow any budget and hope it all works out. If the budget is designed for a lower earner, the higher earner will feel stifled and overly restricted. If it’s designed for the higher earner, the lower earner will find himself spending on things he shouldn’t be.

None of this is to say that all high earners have it easy while all low earners are miserable. I know people on both ends who are surprisingly happy or miserable, opposite of what you think their circumstances justify. It is possible to live well on a low income, just as it’s possible to squander a high income. People who do the best on either end of the spectrum understand that their income level dictates their financial decisions. They don’t blindly say, “Oh, I can take on $10,000 in debt because my friend did it,” or, “I can easily reduce my budget by $5,000 per year because that book told me I could.” They understand that what they have to work with is not the same as the author or talking head and they adjust the advice to suit their personal income level.

This is really a great point that I surprisingly have not seen anywhere else. As you said, the person making 90k has much more wiggle room than the person making 30k (assuming same cost of living/same location). 300k of debt is totally different if you are an anesthesiologist making 400k/year vs. a school teacher making 30k a year; it’s an apples to oranges comparison.

This is something I get hung up on when I’m writing money-saving tips on my blog. I write about things I cut from my budget, but I realize not everyone has all the same items in their budget. I don’t want to highlight exact income amounts, however, because I don’t feel comfortable doing that on my blog.

However, I think many people, regardless of income, have expenses that they probably shouldn’t have because we tend to place necessity status on luxuries. Like cell phones and cable TV. So, yes, budgets will vary, but there are some things that most people will have regardless of income and whether or not it makes sense for them.

Yep, and some of us just don’t care about having some of the things that others have so we can have tremendous savings in those areas. I am always interested in seeing the clothing budget that is tucked into every budget and can’t begin to understand why adults need to be spending money monthly for clothes (I do understand that kids grow and may not get hand-me-downs). I can go months without buying new clothes and have actually gone a year or more at a time without purchasing new clothes. Today I came home one happy lady from the thrift store since I had picked up a sweater in my size and in my colors that will go with just about everything in my closet. Cost me $2 and I suspect it cost the original buyer $30-40 but what do I know, I haven’t been shopping for clothes in a regular store for years. Last week I also found some clothes that fit at the thrift store too. Our thrift store burnt down 5 months ago and so it is just reopened and somewhere along the line someone donated a lot of clothes in my size range and I will be checking them out carefully before they are all gone. Why? because the last time I went on a thrift store spending spree for clothes 10 years ago I got some garments that at this point in time I have probably worn 300-400 times! Petty good for a $4 jumper and a 28 cent top! Someone with a high income might never see the inside of a thrift store, only the dumping off side, but I bet what they buy at full price (or even on sale) at regular stores, can’t beat my joy at finding something that I will get a lot of use from over the next 10+ years! Since my size of clothes are rarely seen in thrift stores (and in the quality that I am seeing from this lady or ladies), I make hay while the sun shines so to speak and get what I can. Then I will be able to go for years again without new clothes 🙂